how did the housing market get so inflated, and is it different from what happened in 2008?
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2008 was primarily an issue of giving mortgages to people that had no business getting them. They were giving mortgages to people with horrible credit scores, people with super low down payments, etc.
These mortgages were then repackaged and sold as groups of mortgages. The idea was that if you put thousands of mortgages together, it’s highly unlikely they’d *all* fail, and that the ones that succeeded would pay off the failures. This general concept makes sense; the more mortgages in a group, the safer the group is to buy. This is called a mortgage backed security.
These mortgages were mostly fine as long as the housing market kept going up. People could sell their houses and cover the entire mortgage in an emergency because the house was going up in value so fast.
This became an issue when the housing market slowed down. All of a sudden, you had people making 60k a year that couldn’t even come close to covering their mortgage. When these started failing, the mortgage backed securities described above started to crater in value. Unfortunately, banks and 401k providers were holding a LOT of these. When banks start failing, businesses can’t get loans and people lose their savings. This spiraled out of control pretty quickly.
2022 is a different time. We put into place regulations about what sorts of mortgages we can give out, so the failure risk is a lot lower. We also put into place regulations that are designed to prevent banks from purchasing risky assets in the large quantities they did in 2008.
2022 inflation is partially driven by pandemic stimulus money. It’s also partially driven by remote work, which means less people need to live in the city. A housing market crash is possible because of this, but it (in theory) shouldn’t cause a major financial crisis due to the regulations mentioned above.
This isn’t an exact ELI5 article, but it is a good read as to how we got here.
Supply also has a lot to do with it. The supply chain during Covid made it difficult for building materials to get to destinations to built new homes. Affluent home buyers wanted to move out of the (Covid-ridden) urban areas into the suburbs. Interest rates were at an all time low.
https://www.forbes.com/advisor/mortgages/why-houses-are-expensive/
Covid also had a huge impact on pricing as builders were forced to stop working and resource shortages led to a reduction in supply. Demand remained constant while supply was restricted. Now there is a huge demand with limited supply that leads to increased prices. It will take years for the supply to catch up to the demand.
I have read one reason is big corporations buying up housing, then renting them & selling them at inflated prices, inventories so low bidding wars are common along with for going inspections
Some good answers here, but there’s a glaring detail that hasn’t been mentioned yet, and that’s interest rates. Tldr at the bottom.
Federal banks only really do one thing: choose how much money is out there. They do this by lowering the interest rates in the country. Private banks like Wells Fargo or Bank of America can then hand out loans at cheaper rates, hence putting more money into the pockets of everyday people.
During the pandemic, people needed money because the world shut down. So the federal bank dropped interest rates. A lot. A huge, historic amount, actually.
At this point, everyone was thinking of buying a home because why not? Those who kept their jobs had money, were stuck inside, and banks made it really easy to get a mortgage.
TLDR: 2008 was a different story. Banks were corrupt and gave mortgages to people who really didn’t have the money. 2020-2022 is different in that a lot of people had the money, and had every reason to spend it. So they spent it on homes.
Housing prices today are driven by:
– limited supply. Not enough new housing had been built in the past 15 years or so.
– high demand. People put off buying a home for the first time for a variety of reasons. They are now interested in buying.
– low interest rates. Related to the above, low interest rates of mortgages means people can more easily afford a mortgage and are getting in the market. Even with the recent rise in rates, interest rates are still historically on the low end.
People who are buying today can afford the houses they are buying. The amount of just straight up cash offers is pretty crazy.
2008 was the result of years of giving people who shouldn’t have gotten loans, loans. People were getting things balloon mortgages that are very cheap at first, but get very expensive later on. They banked on the value of the home going up. If the value goes up enough, you can refinance for better terms, or just cash out the equity. That only works for so long and there were complicated knock on effects due to how the bar loans were bundled into various securities.
If the housing market tanks today, it won’t have nearly the effect it did in 2008.
It’s weird no one is bringing up the cash payments. Record number of houses being bought with cash payments by companies, except these “cash payments” are actually unsecured loans. On the books the company now owns a rental house that they can use to demonstrate more income and the risk of these loans is being obscured.
As an aside, I suspect that a lot of boomers are holding onto their houses because they imagine getting much more for them next year. If the market cools a bit I can imagine downsizings happening that had been previously postponed. And as those boomers die or move into assisted living facilities, there should be a very large pulse of supply hitting the market.
2008 was a crisis of what’s known as subprime mortgages. Essentially, banks gave loans to people who weren’t the best at paying them off, hence the term “subprime”. Why? Banks didn’t care about those loans, they bundled them up and sold these loans off to other people. That’s what incentivized banks to even give out these subprime mortgages in the first place.
Normally, banks only give loans out to people good at paying them back. Now that there’s more people that banks can give loans to, there’s more people that can “afford” to buy a house (hint: they actually can’t, they’re living beyond their means). This new influx of buyers drives house prices up. It’s key to remember here that this increase in house prices is not sustainable. This is called a bubble, a term that was thrown around a ton on the news and in economic circles. What do bubbles do? They pop, and this housing bubble in 2008 popped *bigly*. The ripple effects extended across the world, and caused an economic depression.
What’s different now is that the “people” buying up these houses have money. I put people in quotation marks because they often aren’t, rather, they are corporations or massive landowners with huge amounts of money to spare. Regular people simply cannot keep up, as they get outbid for houses that are not worth the amount of money that the big fish can slap down. This is the key difference. The 2008 bubble was caused by more people entering the market, this recent increase in house prices is caused by more money entering the market.
40% of all the $ ever printed were printed in the last 2 years. Global economy is flooded with USD.
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